##### Table of Contents

United States



SECURITIES AND EXCHANGE COMMISSION



Washington, D.C. 20549



FORM 10-KSB/A

Amendment No. 1



(Mark One)



/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2004



OR



/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES
EXCHANGE ACT OF 1934



For the transition period from
            to



Commission File No. 33-960-70-LA



THANKSGIVING COFFEE COMPANY, INC.

(Name
of small business issuer in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 94-2823626                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)



19100 South Harbor
Drive

Fort Bragg, California 95437

(Address of principal executive officers)(Zip Code)



Issuers telephone number: (707) 964-0118

Securities registered under Section 12(b) of the Exchange Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered



Securities registered under Section 12(g) of the Exchange Act:



---

(Title of class)



---

(Title of class)



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes \X\ No \ \



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- KSB or any amendment to this Form 10-KSB. \X\



State issuers revenues for its most recent fiscal year: $4,891,992



There has been one trade in the Companys Common Stock since 1999. In June 2004, 750 shares were traded at $4.50 per share. See Part
II, Item 5, Market for Common Equity and Related Stockholder Matters. The aggregate market value of common equity held by non-affiliates as of December 31, 2004, using the June 2004 price per share, was $1,163,448.



As of March 25, 2005, there were 1,236,744 shares outstanding of common stock of the
issuer.



DOCUMENTS INCORPORATED BY REFERENCE



None.



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##### Table of Contents

Table of Contents



|                             |  |  
|---------------------------- |  | -
|Explanatory Note             |  | 1
|                             | 
|Part II                      |  |  
|                             | 
|Item 7. Financial Statements |  | 2
|                             | 
|Part III                     |  |  
|                             | 
|Item 13. Exhibits            |  | 2







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##### Table of Contents

Explanatory Note



This Amendment
No. 1 to the Annual Report on Form 10-KSB of Thanksgiving Coffee Company, Inc. (the Company) amends the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, originally filed with the Securities and
Exchange Commission (the SEC) on March 23, 2005 (the Original Filing).



The Company is filing this Amendment No. 1 solely to include in the Report of Independent Accountants to the financial statements (provided pursuant to Part II, Item 7) confirmation that the audit was
performed by the Companys Independent Accountants in accordance with standards of the Public Company Accounting Oversight Board. The paragraph confirming performance of the audit in accordance with those standards was inadvertently omitted
from the Report of Independent Accountants included in the Original Filing. Because the audit was originally performed in accordance with the standards of the Public Company Accounting Oversight Board (although the Report of the Independent
Accountants included in the Original Filing failed to so state), no changes to the financial statements are required or have been made.



Except as described above, no other changes have been made to the Original Filing. This Amendment No. 1 does not amend or update any other
information set forth in the Original Filing, and the Company has not updated disclosures contained therein to reflect any events that occurred at a date subsequent to the filing of the Original Filing.



---

##### Table of Contents

Part II



|ITEM 7 | FINANCIAL STATEMENTS
|------ | --------------------



Information in response to this item is set forth in the Financial Statements beginning on page F-1 of this report.





Part III



|ITEM 13 | EXHIBITS
|------- | --------



|       |  |                                                                                                                                                                                                              
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    |  | Restated Articles of Incorporation of the Company.+                                                                                                                                                          
|       | 
|3.2    |  | Bylaws of the Company.+                                                                                                                                                                                      
|       | 
|3.2.1  |  | Amendment No. 1 to Bylaws of the Company, dated June 3, 1996.++ Business Loan Agreement dated as of September 5, 1995 by and between the Company and Wells Fargo Bank, N.A., as amended on August 11, 1997.++
|       | 
|10.1   |  | Lease agreements for the Companys Fort Bragg facilities.++++                                                                                                                                                
|       | 
|10.2   |  | Extension of Term and Further Amendment to Lease Agreement dated April 1, 1992.+++++ Further Amendment to Lease Agreement dated July 1, 1992.+                                                               
|       | 
|10.2.1 |  | Third Amendment to Lease Agreement dated July 1, 1994.+                                                                                                                                                      
|       | 
|10.2.4 |  | Exercise Option to Extend Lease Agreement April 1, 1995.+                                                                                                                                                    
|       | 
|10.3   |  | Lease Agreement for the Companys Bakery in Mendocino.++++                                                                                                                                                   
|       | 
|10.4   |  | Sample Coffee Purchase Agreement.+                                                                                                                                                                           
|       | 
|10.5   |  | Promissory Note issued by the Company to Joan and Paul Katzeff dated as of April 17, 1996.++++                                                                                                               
|       | 
|10.6   |  | Summary Plan Description of the Companys Profit Sharing Plan. +++                                                                                                                                           
|       | 
|10.8   |  | Promissory Note issued by the Company to Joan and Paul Katzeff as of April 1, 2002.****                                                                                                                      
|       | 
|10.9   |  | Promissory Note issued by the Company to Joan and Paul Katzeff as of November 15, 2003.*                                                                                                                     
|       | 
|10.10  |  | License Agreement between the Company and the American Birding Association, Inc.**                                                                                                                           
|       | 
|10.11  |  | Promissory Note issued by the Company to the Savings Bank of Mendocino County.**                                                                                                                             
|       | 
|10.12  |  | Promissory Note issued by the Company to the Savings Bank of Mendocino County.**                                                                                                                             
|       | 
|14.1   |  | Code of Ethics*                                                                                                                                                                                              
|       | 
|23.1   |  | Consent of Salliman, Yang & Alameda, An Accountancy Corporation                                                                                                                                              
|       | 
|31.1   |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                              
|       | 
|31.2   |  | Certification of President Pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       
|       | 
|31.3   |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                          
|       | 
|32.1   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                      
|       | 
|32.2   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                      
|       | 
|32.3   |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                      

---

|+ | Incorporated by reference to the exhibits to the Companys Registration Statement on Form S-1 (File No 33- 96070-LA).
|- | ---------------------------------------------------------------------------------------------------------------------

|++ | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended March 31, 1998.
|-- | ------------------------------------------------------------------------------------------------------------

|+++ | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended June 30, 1998.
|--- | -----------------------------------------------------------------------------------------------------------

|++++ | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended September 30, 1998.
|---- | ----------------------------------------------------------------------------------------------------------------

|+++++ | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year ended December 31, 1998.
|----- | ------------------------------------------------------------------------------------------------------------

|* | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year ended December 31, 2003
|- | -----------------------------------------------------------------------------------------------------------

|** | Incorporated by reference to the exhibits to the Companys Form 10-KSB for the year ended December 31, 2004.
|-- | ------------------------------------------------------------------------------------------------------------

|**** | Incorporated by reference to the exhibits to the Companys Form 10-QSB for the quarter ended June 30, 2002.
|---- | -----------------------------------------------------------------------------------------------------------



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##### Table of Contents

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



THANKSGIVING COFFEE
COMPANY, INC.



|                |  |                                                                  |  |                
|--------------- |  | ---------------------------------------------------------------- |  | ---------------
|                |  |                                                                 
|Name            |  | Title                                                            |  | Date           
|                |  |                                                                 
|/s/Paul Katzeff |  | Chief Executive Officer(Principal Executive Officer)and Director |  | January 3, 2006
|                |  |                                                                 
|Paul Katzeff    |  |                                                                 
|                |  |                                                                 
|/s/Joan Katzeff |  | President and Director                                           |  | January 3, 2006
|                |  |                                                                 
|Joan Katzeff    |  |                                                                 
|                |  |                                                                 
|/s/Roy Doughty  |  | Director                                                         |  | January 3, 2006
|                |  |                                                                 
|Roy Doughty     |  |                                                                 
|                |  |                                                                 
|/s/Sam Kraynek  |  | Chief Financial Officer(Principal Financial Officer)             |  | January 3, 2006
|                |  |                                                                 
|Sam Kraynek     |  |                                                                 



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##### Table of Contents

Report of Independent Accountants



To The Board of Directors

Thanksgiving Coffee Company, Inc.

Fort Bragg, California



We have audited the
accompanying balance sheets of Thanksgiving Coffee Company, Inc. (a California Corporation) as of December 31, 2004 and 2003 and the related statements of operations, retained earnings, and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards of the Public Company
Accountancy Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Thanksgiving Coffee Company, Inc. at December 31, 2004 and 2003, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.





SALLMANN, YANG &
ALAMEDA

An Accountancy Corporation



/s/Sallmann, Yang & Alameda



Pleasanton, California

March 18, 2005



F-1



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Balance Sheets



|                                       |  |              |            |   |      |   |            |  
|-------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                       |  | December 31, |           
|                                       |  | 2004         |            |   | 2003 |  
|Assets                                 |  |              |            |   |      |   |            |  
|Current assets                         |  |              |            |   |      |   |            |  
|Cash                                   |  | $            | 111,556    |   |      | $ | 40,463     |  
|Accounts receivable                    |  |              | 277,853    |   |      |   | 343,052    |  
|Inventories                            |  |              | 452,537    |   |      |   | 409,698    |  
|Prepaid expenses                       |  |              | 40,551     |   |      |   | 40,703     |  
|Deferred tax asset                     |  |              | 3,400      |   |      |   | 39,300     |  
|                                       |  |              |            |   |      |   |            |  
|Total current assets                   |  |              | 885,897    |   |      |   | 873,216    |  
|                                       |  |             
|Property and equipment                 |  |              |            |   |      |   |            |  
|Property and equipment                 |  |              | 2,827,793  |   |      |   | 2,664,598  |  
|Accumulated depreciation               |  |              | (2,214,248 | ) |      |   | (2,128,605 | )
|                                       |  |              |            |   |      |   |            |  
|Total property and equipment           |  |              | 613,545    |   |      |   | 535,993    |  
|                                       |  |             
|Other assets                           |  |              |            |   |      |   |            |  
|Deposits and other assets              |  |              | 60,181     |   |      |   | 52,379     |  
|Goodwill                               |  |              | 171,773    |   |      |   | 171,773    |  
|Other intangibles, net of amortization |  |              | 36,192     |   |      |   | 38,288     |  
|Deferred tax asset                     |  |              | 78,700     |   |      |   | 44,300     |  
|                                       |  |              |            |   |      |   |            |  
|Total other assets                     |  |              | 346,846    |   |      |   | 306,740    |  
|                                       |  |              |            |   |      |   |            |  
|Total assets                           |  | $            | 1,846,288  |   |      | $ | 1,715,949  |  
|                                       |  |              |            |   |      |   |            |  



See accompanying
notes and accountants report



F-2



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Balance Sheets



|                                                                                                 |  |              |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------ |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                 |  | December 31, |          
|                                                                                                 |  | 2004         |           |   | 2003 |  
|Liabilities and shareholders equity                                                             |  |              |           |   |      |   |           |  
|Current liabilities                                                                              |  |              |           |   |      |   |           |  
|Accounts payable                                                                                 |  | $            | 421,994   |   |      | $ | 346,264   |  
|Notes payable - bank                                                                             |  |              | 23,841    |   |      |   | 246,319   |  
|Notes payable - other                                                                            |  |              | 12,834    |   |      |   | 9,566     |  
|Notes payable - shareholders                                                                     |  |              | 19,919    |   |      |   | 40,919    |  
|Capital lease obligations                                                                        |  |              | 43,806    |   |      |   | 20,853    |  
|Accrued liabilities                                                                              |  |              | 69,748    |   |      |   | 61,398    |  
|                                                                                                 |  |              |           |   |      |   |           |  
|Total current liabilities                                                                        |  |              | 592,142   |   |      |   | 725,319   |  
|                                                                                                 |  |             
|Long term debt                                                                                   |  |              |           |   |      |   |           |  
|Notes payable - bank                                                                             |  |              | 334,159   |   |      |   | 145,313   |  
|Notes payable - other                                                                            |  |              | 34,268    |   |      |   | 13,646    |  
|Capital lease obligations                                                                        |  |              | 123,454   |   |      |   | 41,316    |  
|                                                                                                 |  |              |           |   |      |   |           |  
|Total long term debt                                                                             |  |              | 491,881   |   |      |   | 200,275   |  
|                                                                                                 |  |              |           |   |      |   |           |  
|Total liabilities                                                                                |  |              | 1,084,023 |   |      |   | 925,594   |  
|                                                                                                 |  |             
|Shareholders equity                                                                             |  |              |           |   |      |   |           |  
|Common stock, no par value, 1,960,000 shares authorized, 1,236,744 shares issued and outstanding |  |              | 861,816   |   |      |   | 861,816   |  
|Additional paid in capital                                                                       |  |              | 24,600    |   |      |   | 24,600    |  
|Retained earnings (accumulated deficit)                                                          |  |              | (124,151  | ) |      |   | (96,061   | )
|                                                                                                 |  |              |           |   |      |   |           |  
|Total shareholders equity                                                                       |  |              | 762,265   |   |      |   | 790,355   |  
|                                                                                                 |  |              |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                       |  | $            | 1,846,288 |   |      | $ | 1,715,949 |  
|                                                                                                 |  |              |           |   |      |   |           |  



See accompanying
notes and accountants report



F-3



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Statements of Operations



|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|-------------------------------------------- |  | -------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                             |  | For the Years ended December 31, |          
|                                             |  | 2004                             |           |   | 2003 |   |           | 2002 | 
|Income                                       |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net sales                                    |  | $                                | 4,891,992 |   |      | $ | 4,741,877 |      |  | $ | 5,010,650 |  
|Cost of sales                                |  |                                  | 2,633,321 |   |      |   | 2,444,722 |      |  |   | 2,587,937 |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Gross profit                                 |  |                                  | 2,258,671 |   |      |   | 2,297,155 |      |  |   | 2,422,713 |  
|                                             |  |                                  |          
|Operating expenses                           |  |                                  |           |   |      |   |           |      |  |   |           |  
|Selling, general and administrative expenses |  |                                  | 2,112,067 |   |      |   | 2,221,927 |      |  |   | 2,108,374 |  
|Depreciation and amortization                |  |                                  | 136,552   |   |      |   | 162,751   |      |  |   | 169,786   |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total operating expenses                     |  |                                  | 2,248,619 |   |      |   | 2,384,678 |      |  |   | 2,278,160 |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Operating income                             |  |                                  | 10,052    |   |      |   | (87,523   | )    |  |   | 144,553   |  
|                                             |  |                                  |          
|Other income (expense)                       |  |                                  |           |   |      |   |           |      |  |   |           |  
|Interest income                              |  |                                  |          |   |      |   | 21        |      |  |   | 330       |  
|Covenant not to compete                      |  |                                  |          |   |      |   | (25,000   | )    |  |   |           |  
|Miscellaneous income (expense)               |  |                                  | 1,461     |   |      |   | (5,945    | )    |  |   | 965       |  
|Gain on sale of equipment                    |  |                                  | 93        |   |      |   |          |      |  |   | 628       |  
|Interest expense                             |  |                                  | (37,396   | ) |      |   | (32,128   | )    |  |   | (57,457   | )
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total other income (expense)                 |  |                                  | (35,842   | ) |      |   | (63,052   | )    |  |   | (55,534   | )
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Income (loss) before income taxes            |  |                                  | (25,790   | ) |      |   | (150,575  | )    |  |   | 89,019    |  
|Income tax (expense) benefit                 |  |                                  | (2,300    | ) |      |   | 11,393    |      |  |   | 24,609    |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net income (loss)                            |  | $                                | (28,090   | ) |      | $ | (139,182  | )    |  | $ | 113,628   |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) per share (basic)            |  | $                                | (0.02     | ) |      | $ | (0.11     | )    |  | $ | 0.09      |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) per share (dilutive)         |  | $                                | (0.02     | ) |      | $ | (0.11     | )    |  | $ | 0.09      |  
|                                             |  |                                  |           |   |      |   |           |      |  |   |           |  



See accompanying
notes and accountants report



F-4



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Statements of Accumulated Deficit



|                                                |  |                                  |          |   |      |   |          |      |  |   |         |  
|----------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                |  | For the Years Ended December 31, |         
|                                                |  | 2004                             |          |   | 2003 |   |          | 2002 | 
|Retained earnings (deficit), beginning          |  | $                                | (96,061  | ) |      | $ | 43,121   |      |  | $ | (70,507 | )
|Net income (loss)                               |  |                                  | (28,090  | ) |      |   | (139,182 | )    |  |   | 113,628 |  
|                                                |  |                                  |          |   |      |   |          |      |  |   |         |  
|Retained earnings (accumulated deficit), ending |  | $                                | (124,151 | ) |      | $ | (96,061  | )    |  | $ | 43,121  |  
|                                                |  |                                  |          |   |      |   |          |      |  |   |         |  



See accompanying
notes and accountants report



F-5



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Statements of Cash Flows



|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                           |  | For the Years ended December 31, |         
|                                                                           |  | 2004                             |          |   | 2003 |   |          | 2002 | 
|Operating activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net income (loss)                                                          |  | $                                | (28,090  | ) |      | $ | (139,182 | )    |  | $ | 113,628  |  
|Adjustments to reconcile net loss to cash flows from operating activities: |  |                                  |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                              |  |                                  | 157,931  |   |      |   | 177,009  |      |  |   | 191,185  |  
|Allowance for bad debts                                                    |  |                                  | (13,974  | ) |      |   | 12,077   |      |  |   | 974      |  
|Deferred income tax expense (benefit) (Increase) decrease in:              |  |                                  | (1,500   | ) |      |   | (12,193  | )    |  |   | (25,409  | )
|Accounts receivable                                                        |  |                                  | 79,173   |   |      |   | (42,196  | )    |  |   | 10,848   |  
|Inventories                                                                |  |                                  | (42,839  | ) |      |   | (30,820  | )    |  |   | 592      |  
|Prepaid expenses                                                           |  |                                  | 152      |   |      |   | (11,751  | )    |  |   | 31,982   |  
|Deposits and other assets                                                  |  |                                  | (5,706   | ) |      |   | (9,845   | )    |  |   | 3,647    |  
|Increase (decrease) in:                                                    |  |                                  |          |   |      |   |          |      |  |   |          |  
|Accounts payable                                                           |  |                                  | 75,730   |   |      |   | 43,361   |      |  |   | (19,330  | )
|Accrued liabilities                                                        |  |                                  | 8,350    |   |      |   | 6,600    |      |  |   | 7,774    |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) operating activities                        |  |                                  | 229,227  |   |      |   | (6,940   | )    |  |   | 315,891  |  
|                                                                           |  |                                  |         
|Investing activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Purchases of property and equipment                                        |  |                                  | (235,390 | ) |      |   | (74,921  | )    |  |   | (217,319 | )
|Gain on sale of equipment                                                  |  |                                  | (93      | ) |      |   |         |      |  |   | (628     | )
|Proceeds from sale of equipment                                            |  |                                  |         |   |      |   |         |      |  |   | 2,389    |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                      |  |                                  | (235,483 | ) |      |   | (74,921  | )    |  |   | (215,558 | )
|                                                                           |  |                                  |         
|Financing activities                                                       |  |                                  |          |   |      |   |          |      |  |   |          |  
|Proceeds from notes payable and capital leases                             |  |                                  | 533,497  |   |      |   | 466,586  |      |  |   | 87,699   |  
|Repayments of notes payable and capital leases                             |  |                                  | (459,148 | ) |      |   | (409,436 | )    |  |   | (221,734 | )
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                        |  |                                  | 74,349   |   |      |   | 57,150   |      |  |   | (134,035 | )
|Net increase (decrease) in cash                                            |  |                                  | 71,093   |   |      |   | (24,711  | )    |  |   | (33,702  | )
|Cash at beginning of year                                                  |  |                                  | 40,463   |   |      |   | 65,174   |      |  |   | 98,876   |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  
|Cash at end of year                                                        |  | $                                | 111,556  |   |      | $ | 40,463   |      |  | $ | 65,174   |  
|                                                                           |  |                                  |          |   |      |   |          |      |  |   |          |  



See accompanying
notes and accountants report



F-6



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements



December 31,
2004 and 2003



1. Summary of Significant Accounting Policies



Nature of Operations



Thanksgiving Coffee Company, Inc. (the Company), was incorporated in California in 1985. The
Company purchases and roasts high-quality whole bean coffees and sells them to restaurants, grocery stores and other retail outlets. Additionally, the Company produces and sells a line of high-quality tea products under the trademark of Royal
Gardens Tea Company. Products are sold through the Companys distribution network in Northern California, nationally through common carriers selling direct, or through brokers and distributors. Distributors and retailers do not have the right
to return products. The Company also sells coffee, tea and related specialty products through mail order and Internet sales on a nationwide basis. Additionally, the Company operates a sandwich and baked goods store in Mendocino, California.



Basis of Presentation



The Company has prepared the financial statements on the accrual basis of accounting in
accordance with generally accepted accounting principles in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.



Concentration of Credit Risk



The Company grants credit to customers in the retail and food service industries throughout
the country. Consequently, the Companys ability to collect the amounts due from customers is affected by economic fluctuations in the retail and food service industries.



Inventories



Inventories are stated at the lower of cost (first-in, first-out) or market.



Property and Equipment



Property and equipment are carried at cost less accumulated depreciation. Depreciation is provided on the straight-line and 150% declining balance methods over estimated useful lives of the assets. The following
useful lives are used:



F-7



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)



Property and Equipment (continued)



|                                      |  |              
|------------------------------------- |  | -------------
|Equipment                             |  | 7 to 12 years
|Furniture and fixtures                |  | 5 to 7 years 
|Leasehold improvements                |  | 7 to 39 years
|Transportation equipment              |  | 5 years      
|Marketing equipment                   |  | 5 to 7 years 
|Capitalized website development costs |  | 3 years      



Leasehold improvements are carried at
cost and are amortized over the shorter of their estimated useful lives or the related lease term. Expenditures for major renewals that extend the useful lives of property, fixtures and improvements are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization expense related to production facilities is included in cost of sales.



The Company adapted Emerging Issues Tax Force (EITF) No. 00-2, Accounting for Web Site DevelopmentCosts, in 2001. This accounting rule provides guidance regarding
capitalization or expense of certain website development costs. Accordingly, website development costs incurred in the operation phase that will result in future added functionality are capitalized and expenditures for training, administration and
maintenance of an existing website are expensed as incurred.



For income tax
purposes, depreciation is computed using the accelerated cost recovery system and the modified cost recovery system.



Stock Based Compensation



The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretations. As such, compensation expense is recorded on the date of the grant only if the current market price of the underlying stock exceeds the exercise price. The
Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards (FASB) No. 123, Accounting for Stock-Based Compensation, which establishes a fair value method of accounting for stock options and
similar equity instruments. At present, there are no outstanding stock options that were granted to employees, and the Company has no plans to offer stock-based compensation to its employees or others.



F-8



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)



Goodwill and Other Intangible Assets



As of January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Intangibles. Goodwill
is assigned to a specific reporting unit and is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the reporting units carrying amount is greater than its
fair value. Intangible assets with definite lives are amortized over their useful economic lives. Financial condition and results of operations in accordance with FASB Statement No. 142 are reflected in the accompanying 2004 and 2003 financial
statements.



Intangible assets are amortized over the following estimated
useful lives using primarily straight-line basis.



|                |  |              
|--------------- |  | -------------
|                |  | Life in Years
|Leasehold value |  | 14           
|Trademarks      |  | 17           
|Refinance costs |  | 5            



Income Taxes



The Company accounts for income taxes under the asset and liability method as prescribed by
Statement of Financial Accounting Standards (FASB) No. 109, Accounting for Income Taxes. As such, deferred income tax assets and liabilities are recognized for the future tax consequences of the differences between the financial
statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.



Retirement Plan



In 2003 the Company converted its existing profit sharing plan into a
401(k) savings plan. The plan covers substantially all Company employees and allows pre-tax contributions through a salary deferral program. Employer contributions are on a discretionary basis with substantially all employees eligible for allocation
of employer contributions. Employees are 100% vested in amounts they contribute and vest over years of service in employer contributions. No employer contributions to the profit sharing/401(k) plan were made for the years ended December 31, 2004,
2003 and 2002, respectively.



F-9



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



1. Summary of Significant Accounting Policies (continued)



Compensated Absences



Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. The
Companys policy is that fully vested vacation is accrued at each quarter end. The accrued liability for vacation pay was $6,500 and $11,300 as of December 31, 2004 and 2003, respectively and such amounts are included in accrued liabilities.
Carryover paid sick days are not available, nor ever considered vested.



Advertising



Advertising costs are expensed as incurred,
except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of mail order solicitation and catalog costs. For years ending December 31, 2004
and 2003 the Company did not engage in any direct response advertising that would require capitalization. Advertising costs charged to expense were $26,879, $43,759 and $14,907 for the years ended December 31, 2004, 2003 and 2002, respectively.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Accordingly, actual results could differ from those estimates.



Revenue Recognition



The Company adopted Securities and Exchange Commission Staff Accounting Bulletins No. 101
(SAB101). Revenue Recognition in Financial Statements in 2002, retroactive to November 1, 2000. No restatement of the consolidated financials was necessary since the financials were already in conformity with the revenue
recognition principles and not material transactions were effected by this adoption.



Revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs, the sales price is fixed or determinable and collectibility is reasonably assured. Product is considered delivered and revenue is recognized when
title and risk of loss have been transferred to the customer. Under the terms and conditions of the sale, the transfer of title may occur either at the time of shipment or when product is delivered to the customer.



F-10



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



2. Accounts Receivable



Accounts receivable consist of the following:



|                                      |  |      |         |   |      |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                      |  | 2004 |         |   | 2003 |  
|Accounts receivable                   |  | $    | 281,540 |   |      | $ | 363,157 |  
|Due from employees                    |  |      | 3,449   |   |      |   | 1,005   |  
|                                      |  |      |         |   |      |   |         |  
|                                      |  |      | 284,989 |   |      |   | 364,162 |  
|Less: Allowance for doubtful accounts |  |      | (7,136  | ) |      |   | (21,110 | )
|                                      |  |      |         |   |      |   |         |  
|                                      |  | $    | 277,853 |   |      | $ | 343,052 |  
|                                      |  |      |         |   |      |   |         |  



The Company utilizes a percentage
method to establish the allowance for doubtful accounts. The estimated allowance ranges from 1% to 10% of outstanding receivables. Bad debt expense (recovery) for the years ended December 31, 2004, 2003 and 2002 was $(2,773), $24,508 and $3,224,
respectively. The adjustment to the allowance account for the years ended December 31, 2004 and 2003 was $13,974 and $12,077, respectively.



3. Inventories



Inventories consist of the following:



|                                                        |  |      |         |      |   |        
|------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                        |  | 2004 |         | 2003
|Coffee                                                  |  |      |         |      |   |        
|Unroasted                                               |  | $    | 152,226 |      | $ | 157,078
|Roasted                                                 |  |      | 78,430  |      |   | 69,497 
|Tea                                                     |  |      | 15,088  |      |   | 19,522 
|Packaging, supplies and other merchandise held for sale |  |      | 206,793 |      |   | 163,601
|                                                        |  |      |         |      |   |        
|Total inventories                                       |  | $    | 452,537 |      | $ | 409,698
|                                                        |  |      |         |      |   |        



F-11



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)

4. Property and Equipment



Property and
equipment consist of the following:



|                                      |  |      |            |   |      |   |            |  
|------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                      |  | 2004 |            |   | 2003 |  
|Equipment                             |  | $    | 1,531,115  |   |      | $ | 1,553,854  |  
|Furniture and fixtures                |  |      | 276,628    |   |      |   | 294,411    |  
|Leasehold improvements                |  |      | 421,811    |   |      |   | 420,121    |  
|Transportation equipment              |  |      | 168,695    |   |      |   | 123,936    |  
|Marketing equipment                   |  |      | 14,077     |   |      |   | 18,427     |  
|Capitalized website development costs |  |      | 166,861    |   |      |   | 148,506    |  
|Property held under capital leases    |  |      | 240,706    |   |      |   | 105,343    |  
|                                      |  |      |            |   |      |   |            |  
|Total property and equipment          |  |      | 2,819,893  |   |      |   | 2,664,598  |  
|Accumulated depreciation              |  |      | (2,206,348 | ) |      |   | (2,128,605 | )
|                                      |  |      |            |   |      |   |            |  
|Property and equipment, net           |  | $    | 613,545    |   |      | $ | 535,993    |  
|                                      |  |      |            |   |      |   |            |  



Depreciation expense for the years
ended December 31, 2004, 2003 and 2002 was $155,835, $177,001 and $185,678, respectively.



5. Goodwill and Other Intangible Assets



As part of the adoption of Statement of Financial Accounting Standards (FASB) No. 142, Goodwill and Other Tangible Assetsas of January 1, 2002, the Company no longer amortizes goodwill. The Company performed a test of impairment on
goodwill which resulted in no impairment loss as of December 31, 2004 or 2003, respectively. Consequently, there was no change in the carrying value of goodwill in years ended December 31, 2004 or 2003.



Intangible assets subject to amortization consist of the following:



|                         |  |      |         |   |      |   |         |  
|------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                         |  | 2004 |         |   | 2003 |  
|Leasehold value          |  | $    | 67,000  |   |      | $ | 67,000  |  
|Trademark                |  |      | 5,127   |   |      |   | 5,127   |  
|Refinance cost           |  |      |        |   |      |   | 4,500   |  
|                         |  |      |         |   |      |   |         |  
|Total intangible assets  |  |      | 72,127  |   |      |   | 76,627  |  
|Accumulated amortization |  |      | (35,935 | ) |      |   | (38,339 | )
|                         |  |      |         |   |      |   |         |  
|Intangible assets, net   |  | $    | 36,192  |   |      | $ | 38,288  |  
|                         |  |      |         |   |      |   |         |  



Amortization expense for the years
ended December 31, 2004, 2003 and 2002 was $2,095, $6,962 and $5,558, respectively.



F-12



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 2004 |         | 2003
|Notes Payable and Capital Lease Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |      |         |      |   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|Note payable to Merrill Lynch, monthly installments of $4,687 plus interest at 3.3% over the one month LIBOR rate beginning August 1, 2003
(4.42% at December 31, 2003), final payment is due on July 1, 2007. The note payable and the Companys credit line are collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments,
general intangibles and contract rights along with a personal guarantee of up to $150,000 by Paul and Joan Katzeff. |  | $    |        |      | $ | 201,562
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|Working capital line of credit ($200,000 maximum), payable to Merrill Lynch, interest only installments, at 3.3% over the one month LIBOR rate
(4.42% at December 31, 2003), maturing June 30, 2004. The credit line and the Companys note payable are collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles
and contract rights along with a personal guarantee of up to $150,000 by Paul and Joan Katzeff.           |  |      |        |      |   | 190,707
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|Note payable to Savings Bank of Mendocino, monthly installments of $4,307.02 including interest at 3% over prime rate beginning January 1,
2005 (8.25% at December 31, 2004), final payment is due on December 1, 2009. The note payable is collateralized by a security interest of first priority in all accounts receivable, inventory, equipment, instruments, general intangibles and contract
rights. This note is personally guaranteed by the Companys majority shareholder.                        |  |      | 358,000 |      |   |       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |     
|Note payable to majority shareholders, Paul and Joan Katzeff, payable in monthly installments of interest only at 12%, with balance due on
demand after June 30, 1996. The shareholders had subordinated this note to all other notes payable in 2002.                                                                                                                                                                                                                                                       |  |      | 19,919  |      |   | 19,919 



F-13



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt (continued)



|                                                                                                                                                                                                                                                                              |  |      |        |      |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | ------
|                                                                                                                                                                                                                                                                              |  | 2004 |        | 2003
|Note Payable to Mercedes-Benz Credit payable in monthly installments of $691.46 including interest at 6.99%, secured by a vehicle, final
payment due September 24, 2009. The CEO has reduced his compensation by $300 per month to offset the cost of the car to the Company. |  | $    | 33,456 |      |      
|                                                                                                                                                                                                                                                                              |  |     
|Note payable to majority shareholders, Paul & Joan Katzeff, payable in six monthly installments of $4,000 each and a seventh payment of
$1,000, plus interest at 10% per annum. Final payment is due on May 15, 2004.                                                         |  |      |       |      | 21,000
|                                                                                                                                                                                                                                                                              |  |     
|Note payable to Chase Manhattan Bank, payable in monthly installments of $324, including interest at 8.637%, secured by a vehicle, final
payment due on October 26, 2004. The note is personally guaranteed by the Companys majority shareholders.                           |  |      |       |      | 3,118 
|                                                                                                                                                                                                                                                                              |  |     
|Note payable to Chase Manhattan Bank, payable in monthly installments of $304, including interest at 9.90% secured by vehicle, final payment
due on November 16, 2005. The note is personally guaranteed by the Companys majority shareholders.                              |  |      | 3,193  |      | 6,356 
|                                                                                                                                                                                                                                                                              |  |     
|Note payable to Chrysler financing, payable in monthly installments of $335, including interest at 6.00% secured by vehicle, final payment due
on October 30, 2007.                                                                                                           |  |      | 10,453 |      | 13,738



F-14



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt (continued)



|                                                                                                                                                                                |  |      |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                |  | 2004 |          |   | 2003 |  
|Capital Lease Obligations                                                                                                                                                       |  |      |          |   |      |   |          |  
|                                                                                                                                                                                |  |     
|Note payable to Avaya Financial Services, payable in monthly installments of $372, including interest at 12.00%, secured by equipment, final
payment due on June 12, 2007.      |  | $    |         |   |      | $ | 12,677   |  
|                                                                                                                                                                                |  |     
|Note payable to Avaya Financial Services, payable in monthly installments of $871.10, including interest at 12.00% secured by phone equipment,
final payment due August 2009.   |  |      | 40,304   |   |      |   |         |  
|                                                                                                                                                                                |  |     
|Note payable to Manifest Leasing, payable in monthly installments of $444, including interest at 12.909%, secured by equipment, final payment
due March 2007.                   |  |      | 10,238   |   |      |   | 14,249   |  
|                                                                                                                                                                                |  |     
|Note payable to Axis Capital, payable in monthly installments of $709.19, including interest at 16.619% secured by store fixtures, final
payment due September 14, 2009.        |  |      | 28,161   |   |      |   |         |  
|                                                                                                                                                                                |  |     
|Note Payable to G.E. Capital payable in monthly installments of $1,354.53, including interest at 16.78%, secured by equipment, final payment
due on March 1, 2009.              |  |      | 49,154   |   |      |   |         |  
|                                                                                                                                                                                |  |     
|Note payable to US bancorp payable in monthly installments of $462, including interest at 14.237%, secured by equipment, final payment due on
May 22, 2009.                     |  |      | 18,094   |   |      |   |         |  
|                                                                                                                                                                                |  |     
|Note payable to National Financial Services, payable in monthly installments of $1,414, including interest at 10.512%, secured by equipment,
final payment due on May 10, 2006. |  |      | 21,309   |   |      |   | 35,243   |  
|                                                                                                                                                                                |  |      |          |   |      |   |          |  
|                                                                                                                                                                                |  |     
|                                                                                                                                                                                |  |      | 592,281  |   |      |   | 517,932  |  
|                                                                                                                                                                                |  |     
|Less current portion                                                                                                                                                            |  |      | (100,400 | ) |      |   | (317,657 | )
|                                                                                                                                                                                |  |      |          |   |      |   |          |  
|                                                                                                                                                                                |  |     
|Long term portion of notes payable                                                                                                                                              |  | $    | 491,881  |   |      | $ | 200,275  |  
|                                                                                                                                                                                |  |      |          |   |      |   |          |  



F-15



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



6. Long Term Debt (continued)



Interest paid for the years ended December 31, 2004, 2003 and 2002 was $37,326, $32,128 and $57,457, respectively.



As of December 31, 2004, maturities of notes payable and capital lease obligations for each
of the next five years and in the aggregate are as follows:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2005                      |  | $ | 100,400
|2006                      |  |   | 75,014 
|2007                      |  |   | 71,286 
|2008                      |  |   | 74,164 
|2009 and thereafter       |  |   | 271,417
|                          |  |   |        
|                          |  | $ | 592,281
|                          |  |   |        



Based on current borrowing rates, the
fair value of the notes payable and capital lease obligations approximate their carrying amounts.



7. Income Taxes



The components of the
provision for income tax (expense) benefit are as follows:



|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                       |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Current tax (expense) - state          |  | $    | (800   | ) |      | $ | (800   | )    |  | $ | (800   | )
|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Deferred tax (expense) benefit         |  |      |        |   |      |   |        |      |  |   |        |  
|Federal                                |  |      | (4,170 | ) |      |   | 9,750  |      |  |   | 27,466 |  
|State                                  |  |      | 2,670  |   |      |   | 2,443  |      |  |   | (2,057 | )
|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Total deferred tax benefit             |  |      | (1,500 | ) |      |   | 12,193 |      |  |   | 25,409 |  
|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Net (expense) benefit for income taxes |  | $    | (2,300 | ) |      | $ | 11,393 |      |  | $ | 24,609 |  
|                                       |  |      |        |   |      |   |        |      |  |   |        |  



F-16



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



7. Income Taxes (continued)



A reconciliation of the Companys income tax benefit rate to the U.S. federal statutory rate is as follows:



|                                            |  |       |    |  |      |    |  |       |   
|------------------------------------------- |  | ----- | -- |  | ---- | -- |  | ----- | --
|                                            |  | 2004  |    |  | 2003 |    |  | 2002  |   
|Statutory income tax (expense) benefit rate |  | 15.0  | %  |  | 15.0 | %  |  | (15.0 | )%
|Property and equipment differences          |  | 23.8  | %  |  | (2.1 | )% |  | 3.9   | % 
|Nondeductible expense                       |  | 1.3   | %  |  | (1.4 | )% |  | (3.1  | )%
|Officers life insurance                    |  | (11.7 | )% |  | (2.0 | )% |  | (3.4  | )%
|Net operating loss                          |  | (28.9 | )% |  | 0.0  | %  |  | 19.0  | % 
|Net operating loss valuation adjustment     |  | (7.0  | )% |  | 0.0  | %  |  | 27.8  | % 
|Other                                       |  | (1.1  | )% |  | (2.0 | )% |  | (1.5  | )%
|                                            |  |       |    |  |      |    |  |       |   
|Effective income tax (expense) benefit rate |  | (8.9  | )% |  | 7.5  | %  |  | 27.7  | % 
|                                            |  |       |    |  |      |    |  |       |   



The primary components of temporary
differences which give rise to the Companys net deferred tax assets are as follows:



|                                                |  |      |         |   |      |   |         |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                |  | 2004 |         |   | 2003 |  
|Net operating loss and tax credit carryforwards |  | $    | 104,700 |   |      | $ | 93,700  |  
|Depreciation and amortization                   |  |      | (22,000 | ) |      |   | (15,500 | )
|Other                                           |  |      | (600    | ) |      |   | 5,400   |  
|                                                |  |      |         |   |      |   |         |  
|Net deferred tax asset                          |  | $    | 82,100  |   |      | $ | 83,600  |  
|                                                |  |      |         |   |      |   |         |  



At December 31, 2004 the Company has
available unused contributions, manufacturers investment credit, and net operating loss carryforwards that may provide future tax benefits and that expire as follows:



Federal



|                          |  |               |        |                   |   |        
|------------------------- |  | ------------- | ------ | ----------------- | - | -------
|Years Ending December 31, |  | Contributions |        | Net OperatingLoss
|2005                      |  | $             | 12,067 |                   | $ |       
|2006                      |  |               | 758    |                   |   |       
|2008                      |  |               | 3,767  |                   |   |       
|2009                      |  |               | 5,295  |                   |   |       
|2017                      |  |               |       |                   |   | 290,210
|2018                      |  |               |       |                   |   | 128,576
|2023                      |  |               |       |                   |   | 96,867 
|2024                      |  |               |       |                   |   | 49,714 
|                          |  |               |        |                   |   |        
|                          |  | $             | 21,887 |                   | $ | 565,367
|                          |  |               |        |                   |   |        



F-17



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



7. Income Taxes (continued)



California



|                          |  |                                |        |               |   |                   |  |   |        
|------------------------- |  | ------------------------------ | ------ | ------------- | - | ----------------- |  | - | -------
|Years Ending December 31, |  | ManufacturersInvestment Credit |        | Contributions |   | Net OperatingLoss
|2005                      |  | $                              |       |               | $ | 12,051            |  | $ | 64,341 
|2006                      |  |                                | 5,609  |               |   |                  |  |   |       
|2008                      |  |                                | 4,382  |               |   | 3,767             |  |   |       
|2009                      |  |                                | 306    |               |   | 4,539             |  |   |       
|2010                      |  |                                | 1,082  |               |   |                  |  |   |       
|2011                      |  |                                | 1,892  |               |   |                  |  |   |       
|2012                      |  |                                | 59     |               |   |                  |  |   |       
|2013                      |  |                                |       |               |   |                  |  |   | 49,041 
|                          |  |                                |        |               |   |                   |  |   |        
|                          |  | $                              | 13,330 |               | $ | 20,357            |  | $ | 113,382
|                          |  |                                |        |               |   |                   |  |   |        



Income taxes paid for the years ended
December 31, 2004, 2003 and 2002 were $800, $800 and $800, respectively.



8.
Operating Leases



The Company leases its delivery fleet, other vehicles
and some office equipment under noncancelable operating leases with terms ranging from three to five years.



As of December 31, 2004, minimum annual lease payments due under these agreements for each of the next five years and in the aggregate are:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2005                      |  | $ | 52,434 
|2006                      |  |   | 38,722 
|2007                      |  |   | 17,830 
|2008                      |  |   | 4,695  
|2009                      |  |   | 249    
|Thereafter                |  |   |       
|                          |  |   |        
|                          |  | $ | 113,930
|                          |  |   |        



Total operating lease payments for the
years ended December 31, 2004, 2003 and 2002 were $53,178, $56,933 and $60,377, respectively.



F-18



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)

9. Stock Option Purchase Plan



At the
discretion of the Board of Directors, the Company has periodically granted stock options to employees. Outstanding options of 16,000 shares at December 31, 2002 were granted to a single former employee under an agreement amended in 1996. These
options expired, unexercised, on December 31, 2003 and the Company has no future plans to offer stock option compensation to its employees or others. All of the 16,000 options outstanding were exercisable at an exercise price of $5.00 per share.



No options were granted during years ended December 31, 2004, 2003 and 2002,
respectively, and, accordingly, pro-forma income statement presentation as required under FASB Statement No. 123, Accounting for Stock-Based Compensation is not applicable.



10. Long Term Leases



The Company leases its corporate headquarters, warehouse and waterfront facilities from Paul and Joan Katzeff (the Companys majority
shareholders). The lease is classified as an operating lease and provides for monthly rental payments of $8,600. The Company is responsible for all real estate taxes, insurance and maintenance costs related to the facilities. The lease provides for
periodic cost of living increases during the term of the lease, including the option periods. The Company exercised an option to renew for one five-year term on March 31, 1995. The lease has been extended for successive one year terms since March
31, 2000. The Company continues to hold options to renew the lease for three successive five year renewal periods when the current one-year term expires on March 31, 2004. Rental expense under the lease was $103,200 for each of the years ended
December 31, 2004, 2003 and 2002. The Company presently intends to exercise all options under the terms of this lease.



The Company also leases a bakery establishment in Mendocino, California and warehouse premises in Santa Rosa, California under operating leases expiring in 2011 and 2005,
respectively.



Rental expense under these operating leases was $54,445, $52,438
and $50,552 for the years ended December 31, 2004, 2003 and 2002, respectively.



F-19



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##### Table of Contents

Thanksgiving Coffee Company, Inc.



Notes to Financial Statements (continued)



10. Long Term Leases (continued)



As of December 31, 2004, minimum future rental payments under non-cancelable facilities operating leases for each of the next five years and in the aggregate are as
follows:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |  
|2005                      |  | $ | 149,791
|2006                      |  |   | 151,110
|2007                      |  |   | 153,420
|2008                      |  |   | 78,450 
|2009                      |  |   | 55,200 
|Thereafter                |  |   | 102,825
|                          |  |   |        
|                          |  | $ | 690,796
|                          |  |   |        



11. Related Party Transactions



As of December 31, 2004 the Company has (i) one interest only note
payable due on demand and (ii) a principal and interest note, in each case payable to Paul and Joan Katzeff (the Companys majority shareholders). The Company also leases properties from its majority shareholders (see Note 10).



The summary of payments made to Paul and Joan Katzeff in connection with these related party
transactions for the years ended December 31, 2004, 2003 and 2002 are as follows:



|                   |  |      |         |      |   |         |  |   |        
|------------------ |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                   |  | 2004 |         | 2003 |   | 2002   
|Principal on notes |  | $    |        |      | $ | 26,136  |  | $ | 53,720 
|Interest expense   |  | $    | 2,630   |      | $ | 4,050   |  | $ | 7,583  
|Rent expense       |  | $    | 103,200 |      | $ | 103,200 |  | $ | 103,200



F-20